Key Takeaways
- California does not allow a medical, dental, or most other licensed health practices to operate as an LLC. The required vehicle is a professional corporation.
- Under the Moscone-Knox Professional Corporation Act, at least 51% of the practice’s shares must be owned by licensees in its primary profession; specified allied professionals may hold up to 49%.
- No unlicensed person — not a spouse, not an investor, not a business manager — may hold any ownership interest in the practice.
- SB 351, effective January 1, 2026, strengthened the corporate-practice rules: it restricts private equity and hedge funds from controlling clinical decisions, and it voids certain non-compete and non-disparagement clauses in provider agreements.
- Because the practice must be a corporation owned by licensees, real estate and other investments are held in a separate entity — which is exactly the structure the tax and asset-protection strategy already calls for.
Moscone-Knox in Practice: Why California Physicians Can’t Use an LLC
The short answer
California does not permit a medical or dental practice — or most licensed health professions, to operate through an LLC. Under the Moscone-Knox Professional Corporation Act, the practice must be a professional corporation, with at least 51% of its shares owned by licensees in the primary profession and the remaining shares held only by specified allied licensed professionals. No unlicensed person may own any part of it. As of January 1, 2026, SB 351 further tightened the rules around outside control and voided certain non-compete and non-disparagement clauses. The practical consequence is that real estate and other assets must sit in a separate entity, which happens to be exactly what the tax and asset-protection strategy requires.
The rule that surprises out-of-state physicians
In most states, a physician can operate through a professional limited liability company — a PLLC, and get the liability and tax flexibility of the LLC form. California is different, and the difference catches people who assume the national norm applies.
California does not allow LLCs to render professional services for the licensed health professions. The Corporations Code expressly prohibits it. A California physician, dentist, or most other licensed health professionals cannot run the practice as an LLC or a PLLC. The only generally available vehicle for practicing in corporate form is the professional corporation, governed by the Moscone-Knox Professional Corporation Act.
This is not a technicality to work around — it is the controlling framework, and getting the entity wrong has consequences ranging from invalid structure to regulatory exposure. For a physician moving to California, or a California professional who set up the wrong entity, restructuring to comply is a real and sometimes urgent task.
What Moscone-Knox requires
The Moscone-Knox Professional Corporation Act sets the ownership and governance rules for professional corporations. The core requirements for a medical practice:
The 51/49 ownership rule. At least 51% of the corporation’s shares must be owned by licensees in the corporation’s primary profession — physicians, for a medical corporation. The remaining shares, up to 49%, may be held only by specified allied licensed professionals (for a medical corporation, categories such as registered nurses, nurse practitioners, physician assistants, and certain licensed therapists, as the statute enumerates). There is also a limit tying the number of allied owners to the number of primary-profession owners.
No unlicensed ownership. This is the rule that most often surprises people: no unlicensed person may hold any ownership interest in the practice. Not a non-physician spouse. Not an outside investor. Not a business manager. Ownership is restricted to licensees in the permitted categories, full stop. An unlicensed person can serve in limited non-ownership roles (an assistant officer position, for example), but cannot own shares.
Single-profession purpose. The corporation must be organized to render professional services in its specific profession, and its formation documents must say so. There are related requirements — a compliant corporate name, sometimes a fictitious name permit, ongoing filings — that come with operating a professional corporation properly.
These rules sit alongside California’s broader corporate-practice-of-medicine doctrine, which holds that the practice of medicine belongs to licensed physicians, not to corporations or lay owners. Moscone-Knox says what kind of entity the practice must be; the corporate-practice doctrine says who holds clinical authority inside it. A compliant California practice satisfies both.
What SB 351 changed in 2026
California strengthened this framework with SB 351, effective January 1, 2026, and two of its features matter for the professionals this series addresses.
Restrictions on private equity and hedge fund control. SB 351 codifies and sharpens the corporate-practice rules specifically against private equity groups and hedge funds involved with physician and dental practices. It targets arrangements — common in management-services and “friendly PC” structures — where an outside investor effectively controls a practice’s operations behind a physician figurehead. Under the law, management contracts that let a non-physician determine clinical staffing, patient-volume decisions, or clinical judgment are restricted or void. For a physician who has been approached by, or has entered into, a management-services or investor arrangement, this is a significant change in what is permissible.
Voided non-compete and non-disparagement clauses. This is the feature most likely to affect an individual physician directly, and it was not part of the older conventional wisdom. SB 351 voids certain non-compete and non-disparagement clauses in provider agreements, with only narrow exceptions (such as covenants tied to the genuine sale of a business and ordinary confidentiality provisions). A physician whose employment or affiliation agreement contains a broad non-compete or a clause barring them from speaking about quality-of-care concerns should have that agreement reviewed against the new law, because provisions that were routine before may no longer be enforceable.
A related 2026 development worth noting briefly: California also expanded pre-transaction notice obligations for certain healthcare transactions involving management organizations and investors, with implementing details still developing. The regulatory environment around outside investment in California practices is tightening, and anyone structuring or restructuring should confirm the current state of the rules.
Why this forces the two-entity structure
Here is where Moscone-Knox connects to the rest of this series. Because the practice must be a professional corporation owned only by licensees, it is the wrong vehicle — and often a prohibited one, to hold investment real estate, outside investments, or the building the practice operates in.
So those assets go into a separate entity. The real estate sits in a separate LLC that leases the building back to the professional corporation. Outside investments are held outside the PC. The result is the same two-layer structure that the tax strategy and the asset-protection strategy both call for: the professional corporation as the operating layer, and separate entities holding the valuable assets.
In other words, California’s professional-entity rules do not fight the tax-and-protection structure — they require the very separation that structure depends on. The physician who wants to own their building, run a cost segregation strategy, and protect the asset cannot put the building inside the practice anyway; it has to go in a separate LLC. Moscone-Knox makes the separation mandatory; the tax and asset-protection logic makes it advantageous. They point to the same architecture.
The takeaway
For a California physician or dentist, the entity question is settled by law before tax planning even begins: the practice is a professional corporation, owned by licensees, compliant with Moscone-Knox and the corporate-practice doctrine, and — as of 2026, structured to satisfy SB 351’s tightened limits on outside control and its voiding of certain restrictive covenants. That requirement is not an obstacle to the real estate and asset-protection strategy; it is the foundation of it, because it forces the separate-entity structure those strategies already use. Getting the professional corporation right, and keeping it compliant as the rules tighten, is legal work for a California attorney who handles both the healthcare-entity side and the real estate side, which is precisely where the pieces of this series come together.
Work with Bay Legal
California’s rules on professional entities are strict, were tightened again under SB 351 in 2026, and leave no room for the LLC structure physicians use in other states. Getting the professional corporation right — and keeping it compliant as the corporate-practice rules tighten, is the foundation everything else in your structure sits on. To handle it with a California attorney, call Bay Legal at (650) 668-8000 or reach us through baylegal.com/contact.
We structure the professional corporation and the separate real estate and asset-holding entities together, so your practice complies with Moscone-Knox and SB 351 while the separation also serves your tax and asset-protection strategy. If you have an employment or management agreement that may contain a now-void non-compete, we can review it against the new law. To start, reach a California attorney at (650) 668-8000 or baylegal.com/contact.
Because your structure depends on your profession, your ownership, and any existing investor or management arrangements, the useful next step is a conversation about your situation. Call (650) 668-8000.
Frequently Asked Questions
Can a physician own an LLC in California?
Not for the medical practice itself. California does not allow medical, dental, or most licensed health practices to render professional services through an LLC or PLLC; the Corporations Code prohibits it. The practice must be a professional corporation under the Moscone-Knox Professional Corporation Act. A physician can use an LLC for separate purposes, such as holding real estate, but not to operate the practice.
What is the Moscone-Knox Act?
The Moscone-Knox Professional Corporation Act is the California law governing professional corporations for licensed professions. For a medical practice, it requires that at least 51% of shares be owned by licensed physicians, limits the remaining shares to specified allied licensed professionals, prohibits any unlicensed ownership, and requires the corporation to be organized for the single profession it practices.
Can a non-physician own part of a California medical practice?
No unlicensed person may hold any ownership interest in a California medical corporation — not a spouse, investor, or business manager. Up to 49% may be owned collectively by specified allied licensed professionals (such as nurse practitioners, physician assistants, and certain therapists), with physicians owning at least 51%. Unlicensed individuals may only fill limited non-ownership roles.
What did SB 351 change for California medical practices?
Effective January 1, 2026, SB 351 strengthened California’s corporate-practice rules. It restricts private equity groups and hedge funds from controlling clinical decisions, staffing, or billing in physician and dental practices, and it voids certain non-compete and non-disparagement clauses in provider agreements, with narrow exceptions. Physicians with management-services arrangements or restrictive employment clauses should have them reviewed against the new law.
How should a California physician hold their practice’s real estate?
Because the practice must be a professional corporation owned only by licensees, real estate is held in a separate entity — typically an LLC, that leases the building to the corporation. This separation is required by professional-entity law and also serves the tax and asset-protection strategy, making the two-entity structure (professional corporation plus real estate LLC) the standard approach.
This article is general legal information, not legal, tax, or financial advice. Reading this article and contacting Bay Legal, PC do not create an attorney-client relationship; that relationship is formed only by a signed engagement agreement. This article addresses California law and is written for California residents; other states differ. The law changes, and the figures and rules described here are current only as of drafting and may have changed since publication.
